Rent-to-Own: The Benefits and Risks for Home Buyers

Rent-to-own real estate may sound like a dream come true. Under the best circumstances, everyone benefits: Sellers collect rent and have a purchase commitment from the buyers, and the buyers can move in right away. But either way, buying a home is still a major financial commitment. The key to a smooth transaction is ensuring you understand the entire process. Here’s what you need to know:

Why choose a rent-to-own agreement?

Rent-to-own homes are more common when there is a downturn in the real estate market, and numerous homes on the market are vacant. Under a rent-to-own plan, the seller can lock in a price before the market drops further. For tenants, it’s a good option too if there’s a high purchase price on homes in your area, and you may not be able to afford a hefty down payment.

Terms of rent-to-own real estate

Always read your contract closely! It should include the home price, the cost of rent and the deadline for you to exercise your option to buy. It should also specify what portion of the rent payment is credited toward the home purchase—or if you need to write two checks each month, for the rent and for the home payment. Make sure it details what circumstances the contract can be voided, and there is no language that allows the landlord to evict you for a minor infraction after you have made a substantial financial investment.

It’s worth having an experienced real estate attorney look at the contract.

When the agreed-upon lease option expires, the tenant will get the chance to buy the house. Most of the money the tenants have invested in the house will be going towards the purchase price, so if they’re able to qualify for a home loan, the tenants can be in a good place to buy the house. If, however, the tenants aren’t able to swing a home loan, and can’t afford the house, they could be out more money than they would be if they’d just been renting during that time.

Fees for rent-to-own homes

There are extra fees when it comes to rent-to-own properties, including an option fee and maintenance fees. The option fee is likely to cost between 1% and 5% of the purchase price. Tenants can also expect their rent to add up to slightly more than the market rate during the lease. Usually, all or part of the option fee will be set aside as a down payment.

While the home is being rented, the landlord retains ownership but often requires the tenant to assume maintenance responsibilities. Remember that maintenance on a house can be expensive, so consider what state the house is in before agreeing to a rent-to-own property.

Know the risks of rent-to-own real estate

Buyers can get plenty of benefits out of rent-to-own agreements—but not without some big potential roadblocks. In many cases, buyers can rebuild their damaged credit rating while living in the rent-to-own home and paying above-market rent. Make sure to get finances in order and qualify for a home loan before the lease option expires.

Leasing with an option to buy can be a good financial tool if you know what you’re doing. You could make plans for buying a house without needing to qualify for a home loan or ponying up a hefty down payment. But, before you go the rent-to-own real estate route, talk to a lender or mortgage broker to make sure that you will be able to qualify for a loan.

Article originally appeared on Realtor.com.